Socially Responsible Investment on the Move: Pax World Creates New Fund

Pax World launched the first socially responsible mutual fund in the U.S. in 1971. Since then, both the investment management company and the entire field of SRI have seen many changes. Recently, Pax announced a new fund, the Pax MSCI International ESG Index Fund (PXINX). I took the occasion to talk with Pax CEO Joe Keefe about this new investment product, the sustainable investing sector, and the big picture of mainstream investment moving into the sustainability areaâJohn Howell, Editorial Director

John Howell: Pax World has created a new fund. Why? What advantages does it give to you and to your clients?

Joe Keefe: All Pax World Funds follow a sustainable investing approach â fully integrating environmental, social and governance (ESG) factors into investment analysis and portfolio construction.Â In creating the Pax MSCI International ESG Index Fund (PXINX), we actually merged two international funds, one of which was an exchange-traded fund (ETF) and the other an open-end mutual fund, into a new fund.Â We did this in order to lower shareholder costs, realize economies of scale and hopefully provide an attractive option for sustainable or ESG-oriented investors who want exposure to international developed markets in their portfolios.Â The Fund is the only mutual fund in the United States that invests in the MSCI EAFE ESG Index.Â Among the advantages of a passively managed or index-based approach is that, rather than having to choose among and pay the generally higher costs associated with actively-managed funds, an investor can get broad, diversified international exposure in a single fund, with an expense ratio of 0.55% for institutional class shares and 0.80% for individual class shares. Â Â

JH: How does this new fund extend your portfolio of offerings?

JK: Most US investors want some exposure to global markets because we have become a global economy.Â Pax World currently already offers two global funds focused on particular investment themes: our Global Environmental Markets Fund (PGRNX) focuses on resource efficiency while our Global Womenâs Equality Fund (PXWEX) focuses on womenâs advancement and empowerment.Â The Pax MSCI International ESG Index Fund is less thematic, investing in a broadly diversified index of companies in developed markets, outside the US and Canada, with high sustainability or ESG ratings as determined by MSCI ESG Research.Â For many sustainable or ESG-focused investors, we think this index approach is a good way to get exposure to international developed markets along with competitive pricing. And we believe Pax World now offers a nice array of domestic, international and global investment products for the ESG marketplace. Â Â Â Â Â Â

JH: How would you describe Pax Worldâs positioning today compared to other SRIs?

JK: To be honest, we spend little or no time positioning ourselves vis-Ã -vis other SRI firms.Â Our view, as President Kennedy said, is that a rising tide will lift all boats.Â We believe Pax Worldâs new investors and asset growth will come at the expense of so-called mainstream money managers who make the mistake of ignoring sustainability or ESG issues.Â Over the next few decades, we will need to transition from an industrial-age economy powered by coal and oil, where men were mostly in charge, to a sustainable economy powered by clean energy, technology and innovation, where women are no longer held back but are at the table, empowered as equals.Â Sustainable investing is a strategy that will not only help hasten this historic transformation but provides investors with opportunities to profit from it as well.Â At Pax World, that is our focus and our goal: aligning positive investment performance with positive societal outcomes.Â We think more and more investors want precisely that. Â Â Â Â Â Â Â Â Â

JH: How would you describe the overall picture for SRIs today? In the future?

JK: We donât see sustainable investing as a niche strategy for a small subset of investors.Â We see it as the future.Â Changing demographics and a massive intergenerational wealth transfer will empower women investors as well as younger investors, and research shows that these investors are much more inclined to want their investments aligned with their values.Â They donât believe their investments are ethically neutral.Â To the contrary, they want to invest in companies that are good corporate citizens and that are having a positive impact in the world â whether itâs addressing climate change, conserving natural resources, promoting gender equality or fighting poverty and disease.Â They want their money to be part of the solution rather than part of the problem.Â At Pax World, we believe this emerging mindset or sensibility among investors will fuel the growth of our company, and the sustainable investment industry more generally, in the years ahead.Â Â Â Â Â Â Â Â Â

JH: There seems to be movement of mainstream investment funds toward activity in the CSR/sustainability field. How does this affect Pax Worldâs offerings?

JK: The sustainable investing landscape is definitely getting more crowded and competitive.Â There is more interest in the category, more strategies and products are being introduced all the time, and so-called mainstream players are entering the space.Â Thatâs a good thing â an indication of success.Â This trend will only continue and it creates an opportunity as well as an obligation for firms like Pax World to focus relentlessly on better serving investors.Â We will need to offer a diversified menu of investment options, good investment performance, competitive costs and better service while also addressing critical social and environmental issues that motivate sustainable investors.Â That latter piece â what we might call the âimpactâ piece â is important. Whether itâs through proxy voting policies, shareholder engagement with companies in our portfolios, public policy advocacy or direct investments in high impact organizations, Pax World sees sustainable investing as more than simply ESG integration.Â Itâs about impact.Â

I would throw out one challenge to the mainstream asset managers entering the space.Â Rather than simply integrating ESG factors for risk management purposes, or marketing purposes, embrace the notion that sustainable investing should also be about impact.Â One idea would be to weigh in on greater gender diversity on corporate boards.Â (Women hold only 16 percent of Fortune 500 board seats at the moment.)Â Why not adopt a proxy voting policy like we have at Pax World that withholds support from all-male corporate board slates?Â If some of the large mainstream players would join our âSay NO to All-Male Boardsâ initiative, I think the investment management industry could have a real impact, and that we could move from 16 percent to 30 percent women on boards over the next several years. Â Â Â Â Â Â Â Â Â

JH: Whatâs changed in the overall business environment since the crash of 2008 that impacts Pax Worldâs future?

JK: The business and investment environments have changed dramatically.Â Investors are more focused on risk, as well they should be.Â At the same time, there is perhaps still too much risk in capital markets increasingly dominated by high-frequency traders buying and selling stocks and ETFs in milliseconds.Â The result is not only increased volatility but a growing disconnect between financial markets and the underlying economy, widening inequality between those with access to capital and those who simply work for a living, and serious environmental and resource challenges â not the least of which is climate change â which result from the marketsâ exceedingly short-term focus.Â This is a more challenging landscape for long-term investors, which includes most Pax World investors, who are focused on saving for their kidsâ college tuition, retirement, etc.Â They also care about long term issues like climate change that will have significant impacts on society and indeed the planet.Â We have to hope and strategize for ways that long-term thinking can trump short-term thinking â in the markets and in society more broadly.Â If we can make a genuine contribution in that regard, on behalf of Pax World shareholders, then I think our business will be a success.Â Â Â

Pax World Management LLCÂ (âPax Worldâ) is an American investment managementÂ company that seeks to deliver competitive long-term performance to its investors through a process called Sustainable Investing - the full integration of Environmental, Social, and Corporate GovernanceÂ (ESG) factors into investment analysis and decision making. Pax World serves as investment adviser to Pax World Funds, a family of actively managed mutual funds; ESG Managers Portfolios, a series of multi-manager asset allocation funds developed in partnership with Morningstar, IncÂ Associates; and ESG Shares, a family of Sustainable Investing exchange-traded funds (ETFs). Pax World also provides separately managed accountsÂ for institutional investors. www.paxworld.com. Â Â Â Â Â Â Â Â

John Howell is a co-founder and the Editorial Director for 3BL Media. He oversees all original content procurement and creation. He is also the principal of Greenland Inc., which advises on media strategy and communications, new media, and branding and marketing for new campaigns, products, and multi-platform media initiatives. As a publisher-editor-writer, John has worked extensively with a variety of popular magazines and is a frequent contributing writer and blogger. He is an avid reader and music lover and is currently helping to guide the Delta Blues Museum through a re-branding initiative. John lives in the White Mountains of New Hampshire.